Reference · Pricing & valuation
409A valuation
An independent appraisal of a US company's common stock for tax purposes, usually well below the preferred price.
Worked example
A worked example of the 409A-to-preferred gap (illustrative figures):
- A company's most recent preferred round priced at $25/share. Its independent 409A appraisal sets the common stock fair market value at $3/share — a common-to-preferred ratio of just 12%, typical for an earlier-stage company with a large liquidation preference stack ahead of common.
- An employee with options struck at that $3/share 409A price exercises 10,000 options, paying $30,000 out of pocket to convert them into common shares.
- If those shares are later sold in a tender offer priced at $18/share (itself already a discount to the $25 preferred price, since common sits behind preferred in the payout order), the employee receives $180,000 — a $150,000 spread over their $30,000 exercise cost, which is generally taxable.
- The 409A number matters to sellers for exercise and tax planning; it is not what a buyer pays in a secondary sale, which is priced off the common stock's actual expected value in an exit, not the conservative 409A appraisal.
Where this trips people up
The most common confusion is treating the 409A price as the company's value. It is an independent estimate of common stock fair value for tax and option-pricing purposes, deliberately conservative, and it routinely sits well below both the preferred price of the last round and what shares fetch in the secondary market.
Frequently asked
Why is the 409A price lower than the last round price?
Because it values common stock, which lacks the liquidation preferences, protections and rights attached to the preferred shares investors buy. Those differences are worth real money, and the valuation reflects that.
Do secondary transactions affect the 409A?
They can. Sustained secondary trading in a company's shares is evidence of fair value, and appraisers may take it into account — which is one reason some companies prefer to keep secondary activity inside a controlled tender.
See the full glossary entry, or browseevery term.